Revamping Rewards Halts 25 Quarters of Growth at Starbucks

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Starbucks Rewards relaunch

Starbucks’ winning streak of 25 straight quarters of comparable-store sales growth of 5% or greater in the US has come to an end — and a change to an all-important loyalty rewards program that hurt a popular Frappuccino promotion is responsible in part.

CEO Howard Schultz called the company’s latest quarterly poor performance an “anomaly” on CNBC’s Squawk on the Street as shares are down by 0.42% to $57.36 this morning and the company’s revenue of $5.24 billion came in below estimates of $5.33 billion.

“There’s no doubt that we are navigating through a very unusual time,” said Schultz.  “There is a confluence of social and political turmoil at home, weakening consumer confidence, and clearly increasing global uncertainty.” Schultz added that circumstances are “quite different, placing more pressure on us to be more innovative.”

While acknowledging the loyalty program changes could have been better hanlded, Schultz defended the revamped loyalty program as being “more fair” as it’s shifted to spend-based from frequency-based, but he also admitted culpability in the roll-out. “We own that and that’s why it was an anomaly as this is not only a one-time event, but a one time in a decade event,” Schultz said.

Starbucks

The loyalty program changes led to customer pushback and hit a Frappuccino salads event that last year led to a 30% increase in revenue from the prior-year period fell flat this year due to bad buzz over the rewards change. Customers felt the change favored customers who bought more expensive drinks.

Starbucks made the change as some customers were splitting their orders, asking for items to be rung up by cashiers separately in an attempt to game the system and reap faster rewards. The change was perceived as a less than generous move (which the company refutes) but the social buzz led to a decline in traffic.

“What we underestimated was the interdependence of rewards and happy hour,” Schultz said. “In hindsight, we should have built awareness for the Frapp promotion and gave it the breathing room it needed.” Schultz admitted with “candor and humility, we acknowledge we didn’t execute as well as we could have in the U.S.”

Starbucks’ president and COO Kevin Johnson added that “having marketing messages about the rewards and Frappuccino happy-hour programs out at the same time hurt sales…. We didn’t get as much social media buzz and that translated into not as many transactions.”

That said, loyalty membership is up 18% from a year ago with 12.3 million active US users.
Schultz also cited changes in workplace policies including higher pay for store workers and expanded health care benefits for all US employees.

He ended on a bullish note that Starbucks will rebound quickly and post strong accelerated growth. “I see that in fiscal 2017 and beyond,” he promised.

And the lesson here for other marketers and brands? Tinker with loyalty programs—unless you’re improving them—at your peril.

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